Don't pay for Investment Packaging !

It is a well known fact that expensive products like ULIPs and endowment products can considerably reduce your wealth pool over long durations of time. Let me explain with an example. Take two equity funds with 1 lakh each invested in the same portfolios, one being a regular diversified equity fund having a 2 % expense structure while the other being a ULIP product having a 4 % expense structure. Let's assume that equities deliver a 17 % compounded annual return over a 20 year period. The end value of the regular equity fund will be approx Rs.16 lakhs at the end on term while the ULIP product with the same portfolio will notch a mere Rs.11 lakhs at the end of term. The difference in returns is approximately Rs.5 lakhs. With Annuities or SIPs this difference in wealth will only accentuate disproportionately over time. Typically any product that creates a package for you will be expensive. A ULIP is an investment plus insurance package, a MIP is a debt plus equity package, a capital protected structure is a call option plus debt package and there could be many more such examples.  Packages appeal to us because they are convenient, don't require planning (typically most ulip purchases are last minute rush investments to meet the years tax savings target) and almost always are sold as a one point solution to financial expenses that every individual needs to plan for. The most fantastic examples of product packaging are child insurance plans and retirement plans. TV ads lecturing parents on their supreme duty of buying insurance schemes to ensure their child's education needs and a dignified retirement aren't necessarily telling you everything. A look at the details of these products will tell you that these come with huge front loaded distribution expenses. I assure you that you will not like to have these expenses paid from your child's future education fund or your retirement corpus. Don't let creative ads fool you into wrong products. A plain vanilla equity fund along with term insurance will do the same job as a child plan or a retirement plan, at a much cheaper rate. How do you evaluate whether you are investing in an expensive product? - Unpack it! List the various benefits and find the cost of each benefit ,as if you intend to  buy them independently.Let me give you an example of how to unpack a ULIP product. Given your age, say 32 and sum assured, say Rs.10 lakhs ask your insurance advisor to give you a table of investment value. The advisor will give you a table showing investment end value at 6 % and 10 % (as per IRDA guidelines) for say 20 years. For the same sum assured find the price of cheapest term cover. The cheapest term cover for a male of age 32 for twenty years would be approximately Rs2000 annually. The remaining 98000 may be invested in mutual funds assuming 6 % and 10 % for the next 20 years. Find the end value at both rates using Future value of Annuity formula or simply use an excel sheet. You can then see how much more you would be paying for product packaging in ULIP as compared to the unpackaged term insurance plus mutual fund combination. You can compare almost any packaged product with the unpacked one in the same fashion. Do evaluate the costs /expenses paid by you for the convenience of investing in a packaged product as it has a definite impact on your long term financial goals.